NEW YORK (Reuters) – Three years after lifting a ban on crude oil exports, some US shale producers are doing something they've never done before – barring prices for their barrels that will find a home abroad.
A pumpjack is shown outside the Midland-Odessa area in the Perm basin in Texas, USA, July 17, 2018. REUTERS / Liz Hampton
Slate companies, especially those operating in the largest basin in the US, the Perm Basin, are finding new ways to move from the large discount of the US West Texas Intermediate Crude Oil Futures (WTI) to the global benchmark Brent WTCLC1. Isolate LCOc1.
In the second quarter, when WTI's rebate on Brent fluctuated most in more than three years, WPX Energy Inc expanded (WPX.N), SM Energy Co (Sm.n) and Oasis Petroleum Inc. (OAS.N) quietly began to set up specialized hedges, found a Reuters analysis of corporate filings.
The hedges, the first of their kind for these producers, protect against an expansion of the oil price, as their oil is increasingly being sold to foreign buyers.
The hedged volumes are relatively small, but show the growing importance of export revenues as the US plays an increasingly dominant role as a global oil supplier.
Oil production in the US is close to a record 11 million barrels per day (bpd), which dampens the price of WTI over Brent, while encouraging an export boom. Since the lifting of a 40-year ban in 2015, crude oil exports rose to as much as 3 million barrels a day in June.
Traders are watching closely as the two benchmarks spread across the export economy. While a wider rebate makes US oil attractive to overseas buyers, it means lower revenue for growers. Blocking the spread protects export-related revenues.
SEARCH WORLD PRICES
Perm producers have long protected the future revenues of financial instruments, but they were typically associated only with WTI. That changes according to submissions and interviews with brokers, bankers, hedging advisers and business leaders.
"In the past, all of our sales were truly tied to national indices," said Todd Scruggs, vice president and treasurer at WPX Energy. "The fact that we can sell our barrels internationally is a new thing – and we enjoy using it."
The companies identified a price – in this case for WTI at around $ 8 per barrel against Brent – and used contracts known as "base swaps" to fix prices at this level. Basic swaps have become popular among Perm producers to control the spread between regional oil prices in West Texas versus US futures. But now companies are using the swaps to hedge Brent against WTI.
During the second quarter, WPX used Brent WTI base swaps to hedge 3,000 bpd of production in 2020 with a $ 8.40 WTI rebate for Brent. If Brent trades at $ 90 a barrel and WTI at $ 80 in two years, the effective price of WPX will be $ 81.60.
"If we lock in the Brent-WTI spread, we effectively ensure that the sales modalities we've made remain in the money," said Scruggs.
However, WPX may be exposed if this spread should fall to a lower level than the fixed price.
WTI is currently trading at around $ 9.35 under Brent. In the second quarter, the spread increased from around 4.50 to as high as 11.57.
U.S. SHALE EXPORTS RISE
This hedging practice is likely to become more important in the face of rising US crude oil exports and shale producers seeking to accept higher world market prices, said John Saucer, vice president of Mobius Risk Group.
SM Energy hedged about 1.29 million barrels for 2020 at a discount rate of $ 7.97, with additional volumes hedged by 2022. An SM Energy spokeswoman said such swaps are a small part of their hedging strategy.
SM Energy's base swaps cover part of its Midland production "with sales contracts settled at ICE Brent prices," according to a securities submission.
Oasis Petroleum secured 153,000 barrels, or nearly 3 percent of 2018 production, with a difference of $ 10.50 and slightly higher volumes in 2019 for the same price. The company, which has not responded to requests for comments, has recently acquired an area in Perm and operates in the Bakken region of North Dakota.
There may soon be more efficient ways to fix oil export prices, as new Gulf Coast futures based on pricing in Houston rather than the Cushing, Oklahoma, yard will be introduced.
However, infrastructure bottlenecks in the US coastal ports could limit exports, which would depress WTI.
"Banks are working hard to provide differentiated hedge solutions," said Michael Tran, commodities strategist at RBC Capital Markets.
Reporting by Devika Krishna Kumar and Ayenat Mersie in New York; Editing by Marguerita Choy